H&E Equipment Services Inc (HEES) 2024 Q2 法說會逐字稿

Good morning and welcome to the H&E Equipment Services second quarter 2024 earnings conference call. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to everyone on today's call to review our second quarter 2024 financial performance. A press release following our results for the quarter was issued earlier today and can be found along with all supporting statements and schedules on the H&E website that's www.he-equipment.com.

A slide presentation will accompany today's discussion and is also posted on our website under the investor relations tab events and presentations.

On Slide 2, you'll see Joining me on today's call is Bradley Barber, Chief Executive Officer; John Engquist, President and Chief Operating Officer, and Leslie Magee, Chief Financial Officer and Corporate Secretary. Brad will begin this morning's review.

But before I turn the call over to him, please proceed to Slide 3. As I remind you that today's call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and other similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and includes the risks described in the risk factors in the company's annual report on Form 10-K and other periodic reports.

Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

Also, we are referencing non-GAAP financial measures during today's call, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials.

With the initial details of our call complete. I'll now turn the call over to Bradley Barber, Chief Executive Officer of H&E Equipment.

Thank you, Jeff. Good morning. Welcome to our review of second quarter 2024 financial results. As always, we appreciate your continued interest in H&E. Proceed to slide 4. The further expansion of our branch network was a highlight in the second quarter as we demonstrated significant year over year growth in our branch count and increased our US penetration to 31 states.

The expansion served as an important catalyst for growth in the quarter, helping to offset a more challenging business environment as lower nonresidential spending led to declines in key fundamentals. We experienced growth across most financial measures, but at a decreased rate of improvement compared to the second quarter of 2023. I'll expand my comments on key financial metrics and offer some observations on the performance of our rental business. Also, an update on the industry developments and opportunities is in order given the transitory state of construction markets.

I'll close with a quick review of our progress to date on our expansion objectives and what lies ahead as we continue to demonstrate one of the industry's most successful growth profiles. Leslie will follow with a more detailed review of our second quarter financial performance, and then we'll be happy to address any questions.

Slide 6, please. Second quarter results were generally mixed. Of note, total revenues increased 4.5% with the improvement, partially offset by an 11.9% decline in the sale of rental equipment. Margin on the sale of our rental equipment in the quarter rent remained near record levels. Total equipment rental revenues increased 7.2% reflecting a modest rise in rental rates with a more impactful support from expansion initiatives, which I'll discuss in greater detail in a moment.

On a trailing 12 month basis, our equipment rental revenues improved 14.6% compared to the trailing 12 months ending June 30, 2023. Margin for both the second quarter and trailing 12 months were slightly lower. Finally, our fleet size as measured by original equipment cost increased 10.7%, representing the lowest reported year over year growth since the fourth quarter of 2021, a 2.5 year period when we expanded our fleet by more than 55%.

Slide 7, please. Turning to highlights from our rental operations. Revenues in the second quarter improved 6.5% compared to the year ago quarter with margins of 51% compared to 51.8% over the same period of comparison. On a trailing 12 month basis ending June 30, 2024 rental revenues were 14.4% higher.

The growth in revenues demonstrate the significant expansion of our branch network and continued gains from rental rates, since the close of the second quarter in 2023, we opened 15 new locations through our accelerate new location program, including seven openings through the first six months of 2024 and eight location was opened following the close of the second quarter.

Also since November 2023, eight additional branches were added resulting from three separate acquisitions. Our focus on expansion is an ongoing multiyear effort, position in our company in attractive geographic regions with excellent opportunity for long term growth.

Rental rates in the quarter improved 1.9% compared to the year ago quarter with a decline of 0.1% on a sequential quarterly basis. Although year over year comparisons are becoming increasingly difficult rate appreciation over the preceding 24 months ending June 30, 2024, was 7.1%. Physical fleet utilization in the second quarter averaged 66.4%, a decline of 290 basis points compared to the year-ago quarter.

The decline largely related to a reduction in small and medium-sized construction projects and a slower pace of new project starts. The second quarter measure represents a 280 basis point improvement from physical utilization reported in the first quarter of 2024. Finally, dollar utilization in the second quarter was 38.6% compared to 40.6% in the second quarter of 2023, with the lower outcome due largely to a decline in physical utilization.

Next, I want to address our view of current industry conditions and growing opportunities as we navigate the second half of 2024.

Slide 8, please. We maintain our view of a more moderate pace of construction spending and projected starts. The shift in the business cycle, which we addressed during our last quarterly update is indicative of an industry that is transitioning to a more normalized business environment compared to the years of 2022 and 2023.

Recall, during those years, we observed a period of exceptionally strong growth in construction spending resulting in elevated industry fundamentals. The sharp acceleration in spending occurred during a period of extremely tight equipment availability, aggravated by material disruption in supply chains.

In 2024, supply chains have recovered, leading to an ample supply of most equipment lines, while persistently elevated interest rates and more stringent lending standards continue to have an adverse effect on project activity, especially smaller projects, which are component of local project opportunities. Despite this industry backdrop, we are encouraged by the continued expansion of mega project activity across numerous locations in the US, representing a source of protracted demand for our equipment.

Our participation in these multi-year projects continues to grow as our branch expansion efforts lead to increased density and scale. According to data construction network Impact 342 projects with a projected value of $400 million or greater are planned or in progress in our 31 state branch network, approximately 68% of these projects fall within our Gulf Coast, Southeast in Mid-Atlantic regions, which together represent 65% of our current branch count.

Mega projects are a meaningful growth opportunity for H&E and our industry. And given their size and long duration, they provide a more stable base of demand in support of key industry fundamentals. In addition to growth in mega projects further supports is expected from infrastructure spending with increased funding expected to lead greater project activity.

With project expansion expected from both of these major sources of spending, you can see what the latest forecast of 2024 construction spending from Dodge Construction data concludes an increased level of spending compared to the year ago levels. Also the DMR, which is Dodge as measure of the value of nonresidential projects going into planning has been flat or increase of the first six months of 2024, an encouraging indication for growth in project activity for 2025 and beyond. We are confident in the prospects for our industry and therefore remain committed to our growth objectives.

Slide 9, please. We continued to successfully execute our growth strategy with near record achievement in the second quarter, we opened six branch locations during the quarter, which followed a single branch opening in the first quarter, enhancing our presence in the Southeast Gulf Coast and mid-Atlantic regions of the US.

These areas represent attractive geographies with increased construction activity, and that's what long-term potential. Also the completion of our latest acquisition in May 2024, resulted in the addition of four branches in Northern and Central Montana, increasing our presence in the state to six locations while improving our exposure to a diverse set of project opportunities.

We concluded the second quarter of 2024 with 149 branches across 31 states, representing a growth of approximately 45% in the last 36 months ending June 30, 2024. Our targeted goal of 12 to 15 new branch openings, excluding acquired branches, is well within reach as we move into the second half of the year.

Since the close of the second quarter, we announced the opening of a location in Idaho Falls, Idaho, adding to our presence in the inner mountain region and increasing our total number of new locations year to date to eight.

Our 2024 growth fleet expenditures, which we revised last quarter remain in a range of $350 million to $400 million as we leverage our record 2023 expenditures and our young fleet age to meet prevailing market demand. In closing H&E has made tremendous strides over the last three years, growing our presence across the US while establishing a solid record of achievement in supporting improving financial performance and value creation.

We are a pure-play rental company that has achieved an industry leading 45% increase in branch growth since mid 2021, establishing a growing geographic presence in established and emerging regions of opportunity. With this expanded presence cause improving access to the rising mega project activity, encompassing data centers, solar farm installations, advanced manufacturing projects and LNG export facilities to name a few.

Our young fleet age and outstanding mix of equipment are important attributes of our company as is our strong execution at the operating level, including advanced IT systems that cover the rental lifecycle while facilitating the needs of our customers. Expanding these other elements of our operating profile remains a core focus of our management as we position the company to succeed in today's business environment as well as for the next leg of the construction cycle.

Now on to slide 10, and I'm going to turn the call over to Leslie, who will discuss our second quarter financial performance in greater detail. Leslie?

Thank you, Brad. Good morning and welcome, everyone. I'll begin this morning with slide 11, and a review of second quarter revenues, gross profit and profit margin. Revenues in the second quarter totaled $376.3 million, an improvement of $16.1 million or 4.5% compared to the second quarter of 2023. The growth was substantially due to higher rental revenues and sales of new equipment.

Rental revenues grew $16.8 million or 6.5% to $275.5 million compared to $258.7 million in the year ago quarter. Further expansion of our branch network was one of the several factors contributing to the improved outcome.

Since the close of the second quarter of 2023, our branch count increased 18.3% or 23 locations with 15 of the locations, a product of our warm start strategy and eight other locations resulting from the closing of three acquisitions. Also our fleet original equipment cost or OEC increased $279 million or 10.7% over the same period of comparison, concluding the second quarter of 2024 at approximately $2.9 billion.

Finally, rental rates in the quarter were 1.9% better than the year ago quarter, while declining 0.1% on a sequential quarterly basis. Partially offsetting revenues in the quarter was lower physical utilization, which averaged 66.4% or 290 basis points below the year ago outcome. On a sequential quarterly basis, the average physical utilization improved 280 basis points. Revenues from the sale of new equipment increased 20.5% to $10.7 million following a pickup in the sales of aerial work platforms and material handling equipment.

Sales of rental equipment declined 11.9% compared to the year ago quarter to $34.9 million. The result, which was 27% lower on a sequential quarterly basis, reflects an alignment of our fleet management strategy with prevailing industry fundamentals. The average age of equipment fall in a quarter with an estimated 71 months.

Gross profit in the second quarter totaled $171.3 million, up 1.7% from the second quarter in 2023, the gross margin of 45.5% was 120 basis points below the year ago result as lower margins on rentals and an unfavorable revenue mix were partially offset by higher margins on sales of rental equipment. In the second quarter of 2024 total equipment rental margins were 45.5% compared to 46.7% with rental margins of 51% compared to 51.8%.

Finally, margins on sales of rental equipment remained elevated at 62.4% compared to 59.1%, while margins on sales of new equipment improved to 16.9% compared to 14.9%.

Slide 12, please. Income from operations of $62.8 million was $6.7 million lower in the second quarter compared to the same quarter of 2023, and 9.7% decrease resulted in a margin of 16.7% of revenues in the second quarter compared to 19.3% in the year ago quarter with the lower margin due primarily to higher SG&A expense, lower rental margins and an unfavorable revenue mix. The decline was partially offset by higher gross margins on sales of rental equipment.

Proceed to Slide 13, please. Net income in the second quarter was $33.3 million or $0.91 per diluted share compared to net income of $41.2 million or $1.14 per diluted share in the second quarter of 2023. Our effective income tax rate in the second quarter was 27.8% compared to 26.3% for the same quarter in 2023.

Proceed to Slide 14, please. Adjusted EBITDA in the second quarter increased 2.8% to $173.2 million compared to $168.6 million in the year ago quarter. Our adjusted EBITDA margin in the second quarter was 46% compared to 46.8% in the year ago quarter. Higher SG&A expenses were partially offset by an increase in gain on sales of PP&E and exceptionally high margins on sales of rental equipment.

Next slide 15, please. SG&A expense in the second quarter totaled $111.8 million or 12.7% greater than $99.3 million in the year ago quarter. The increase was largely due to our steady growth initiatives with 23 branches opened since the close of the second quarter of 2023, contributing to increased employee salaries, wages, payroll taxes and other benefits and higher depreciation and amortization expense. Also higher expenses relating to facilities, liability, insurance and professional fees contributed to the year-over-year increase.

SG&A in the second quarter was 29.7% of revenues compared to 27.6% in the second quarter of 2023 and included $10.8 million of costs associated with our branch expansion and acquisition activities.

Slide 16, please. Gross rental fleet capital expenditures in the second quarter totaled $122.1 million with net rental fleet capital expenditures of $87.2 million for the six months ended June 30, 2024, these figures were $196.5 million and $113.8 million, respectively.

In addition, gross PP&E capital expenditures in the second quarter were $37.9 million or $34.1 million net of sales of PP&E. And for the six months ended June 30, 2024 gross PP&E capital expenditures totaled $77.1 million with net PP&E capital expenditures of $71.5 million.

Free cash flow used was $82 million compared to free cash flow used of $134 million over the same period of comparison. And excluding acquisitions, adjusted free cash flow for the six months ended June 30, 2024 was $75.7 million.

Slide 17, please. Based on original equipment cost, our fleet five on June 30, 2024, was approximately $2.9 billion, an increase of $279 million or 10.7% compared to our OEC on June 30, 2023, and includes approximately $109 million in fleet acquired. We closed the second quarter with an average fleet age of 40 months compared to an industry average age of 48.1 months.

Average dollar utilization in the second quarter of 2024 was 38.6% compared to 40.6% in the year ago quarter. As Brad previously noted, the decline was due primarily to lower physical utilization. The measure was up 160 basis points on a sequential quarterly basis.

Slide 18, please. A review of the balance sheet reveals a continuation of a solid capital position, including a net leverage ratio of 2.2 times, which remains well within our target range of two to three times and [net debt] maturities before December [2028], on our $1.25 billion of senior unsecured notes and our senior credit facility.

Slide 19, please. Finally, we closed the second quarter with liquidity of $459 million, while excess availability under the ABL facility was approximately $1.7 billion compared to $1.8 billion on December 31, 2023. Our minimum availability as defined by the ABL agreement, remains $75 million and with our excess availability of $1.7 billion, we remain free of any covenant concerns.

And finally, we paid our regular quarterly dividend of $0.275 per share of common stock in the second quarter of 2024. And while dividends are subject to Board approval, it is our intent to continue to pay the dividend.

Moving to Slide 20, please. And to conclude, I confidently say that H&E is a stronger company in 2024, possessing greater geographic reach, a larger, more diverse fleet and a solid capital structure and an experienced management team accustomed to managing a pivot in the business cycle. With these essential attributes in place, we move ahead in 2024 continuing our focus on expansion of our geographic footprint, establishing increased scale in regions where construction spending and growth trends are exceptional.

With 150 branches currently in operation, we intend to grow our participation in the multi-year mega projects opportunity, which as Brad noted, has an expanding presence across our 31 state network. Also, our previously announced decision to reduce our 2024 gross fleet expenditures, while leveraging both our record spending over the past two years.

And our young fleet age positions the company for meaningful free cash flow generation in 2024 when adjusted for transactions. When combined with the available capital resources, we possess ample liquidity to pursue additional expansion opportunities in an industry with a 10% year over year growth expectation in 2024 according to Dodge Construction network.

Operator, we are now ready to begin the Q&A period. Please provide instructions.

(Operator instructions)

[Tim Stein], Raymond James.

Great, thank you. Good morning. I guess the first question was just on the rate environment and how do you think about, I guess relative to your expectations, how things have transpired? Obviously you have responded in terms of base that back to the last quarter in terms of resetting your CapEx outlook.

I'm just curious how you've seen the industry as a whole kind of responding and accordingly. So it's basically looking back in terms of how rates perform relative to your expectations and how you're expecting that to play out as we look through the balance of the year? Again, we'll start again on rental rates. Thanks.

Thank you, Tim, and good morning. Rental rates perform basically as expected, our anticipation has been that, there was an opportunity for them to continue to very incrementally improve, potentially could be flat or slightly down and only 0.1% behind 0.02% excuse me, in Q1 and 0.01% this quarter. So we accept rates where they are, our utilization was slightly disappointing and we hoped that we would see a little bit more improvement in physical utilization within the quarter than we did.

With that as a backdrop, not the proper rate in the least, on a go forward basis as we're continuing to expand our presence on mega projects on a weekly basis, I expect rates to come under more pressure. I want to be clear I don't expect any grand rate decreases on a go forward basis. But I think the likelihood for rates to decrease only on a sequential basis going forward absolutely exist.

Not because we're discounting at all in our local markets for the small and medium sized work that we continue to participate on, just simply due to the weighting that we're starting to build up with mega projects. As you know, mega projects consume vast amounts of equipment for very elongated period of time. In our view, when we do the calculations that the yield result is still very positive for H&E. But however, that could and is likely to lead to some slight degradation in rates on a sequential basis moving forward.

Got it, okay. That's helpful. And then, Brad, just on the, how should we think about if you look at the fleet growth of, call it 11% relative to equipment revenue growth, of closer to seven, how should we think about the dynamic of just cycling through higher cost equipment without a corresponding uplift in rental revenue?

In terms of the inflationary component, is there a way to size that in terms of what that impact is, and I would expect will continue to be a headwind just given the amount of the equipment inflation for the past couple of years?

Yeah. As Leslie stated in our prepared comments, you know what we've sold off the fleet with 71 months old. So there's certainly an incremental inflationary headwind. I won't want to understated, but that's really minimal in the scheme of what we're facing as our utilization look, we've moderated our spending to allow us to come into a better balance with supply and demand and for physical utilization to improve.

As I stated, we were a little dissatisfied not seeing slightly more improvement because of utilization during the quarter. That being said, that inflationary impact does not cause me any real concern. There's mix involved, there's certainly something there, but it's nothing that's going to hurt anyone's modeling. It's a minimal piece of what's occurring in the overall scheme.

Okay. Last quick one Brad. What analysis that a hard one, And I guess the kind of the $64,000 question, but this whole dynamic of softness in the local accounts, which you're not alone in flagging, you obviously have a bit more rate sensitive in parts of that market.

Have you -- has history shown any kind of relationship? And again, I know each cycle is different and very difficult to answer. But just in terms of if there were, we were to start to see some some cuts to benchmark rates, how those markets have historically responded in terms of a lag to changes in policy rates?

Let me answer it this way, I expect zero decline in small and medium or let's just call it local work, that we're not anticipating any decreases. In some cases, we're still getting incremental increases in certain regions with certain products. The discipline that exist, the data that we all possess and I'm speaking of H&E in our larger peer group, which substantially dominate these marketplaces.

We're all using the same set of data. And I believe we are very focused on ensuring that we continue to give good returns on the invested capital. So if we go back to prior cycles. You said it right, each prior cycle has been characterized differently. I don't know that we would even consider COVID, but I think there was an extreme amount of discipline shown in the face of the substantial decline in COVID.

And I think there have very little had basically no concern at this point that small and medium-sized work are small and medium-sized customers are going to start to enjoy any type of decline in rental rates. I think our rental rate output will be a product of how much product we put on mega projects on a go-forward basis.

Got it. Thank you for your time.

Thank you for your question.

[Sharif L Sabahi], Bank of America.

Hi, Good morning. Thanks for taking my question. Just to begin, both you and a large peer have noted that 2024 is a transition type of year to more normalized growth, do you expect 2025 to see another leg up in growth? Or do you expect this to be the new normal type of growth rate for the medium term.

Sharif. It's really early to trying to make that type of prediction. I'll tell you we're fairly optimistic around here and believe that there's a lot of work to be done the small and medium work that has been impacted by these higher for longer interest rates. I think that could pivot relatively quickly.

So I think it's going to depend on when we see interest rates actually start to decline within that, I think would be the answer to the outlook. I don't envision 2025 declining from 2024 levels and I think there's an opportunity that things should get substantially better if interest rates were to decline sooner and maybe more rapidly than our current details are. So it's to be seen, but we don't feel bad about 2025. I'm just not sure how bullish we are on '25 just yet.

Understood. And just given some of your language around mega projects seems like you're still seeing very good uptake on those types of projects. Just for the remainder of the year, what kind of incremental flow-through do you expect to see on EBITDA.

Leslie, can you go (inaudible)

Sure. So a lot of the drivers we've talked about here this morning, but we do expect some pressure on EBITDA flow-through margins in the back half of 2024. And again, as those claims are driven by moderating year over year rate increases, which we've talked about on continued expectations and lowering year-over-year physical utilization.

And then one thing to note is we also expect lower year over year fleet sales in the back half, and we spoke to that earlier in the year. And we haven't seen that play out in a big way. We expect that to increase to a larger degree in the back half of the year. And then also, we're going to have higher costs driven by our focus on our new store openings.

Thank you.

Stanley Elliott, Stifel.

Good morning, everybody. Thank you for the question, Brad, just a little bit on the utilization side. I was curious maybe how did that track through the quarter? And I guess I was trying to get a sense for do you have some of that disappointment was from weather impacting the availability of the equipment out in the market? Or if it really was kind of more of what we're seeing with just some of the smaller local contractors softening a touch?

Yes, Stanley , this is John. I'll take that. Look out, I don't think we're going to point to weather is a material impact to utilization. Really what we're seeing is fewer small and midsized jobs coming out of the ground. And as we continue to see a ramp up with the large mega projects, our participation.

We're very pleased with our rate on these large jobs, and we're seeing continued fleet on a weekly basis more and more fleet going out each and every week. But really what we saw was more of a decline in the small to midsize jobs, which had that impact on utilization.

And with the scale that you guys have have kind of built over the past several years unless you kind of mentioned it on the free cash flow side, how should investors think about H&E's ability to generate stronger free cash flow through the cycle?

Yes. Well, through the cycle, a great question. Obviously, this year we're going to generate nice, very healthy free cash flow at the growth. As you know, we've continued to pay our dividend and are going to continue paying our dividend. Our focus on these 12 to 15 new locations is ironclad unless we were to see a real did not a transition, but a real disruption. We're going to continue to open those up. And as you know, we continue to pack away at tuck in acquisitions.

So we've been able to perfect for those since 2021, but three of them more recently. And so we're still actively pursuing those. All of that matched together with our traditional spending makes it a challenge for us to be free cash flow positive on an annual basis.

That being said we will be approaching a scale in our modeling, probably in the four to five year range with the type of growth profile that we have illustrated over the last few years. That we'll be generating free cash flow. So in the short run, we're opportunistic in the markets are heating up and growing. We're going to grow with them.

But this year, we're certainly going to produce free cash flow. So we'll have some puts and takes depending on the given year for the next few years, and we should settle into a nice rhythm that allows us to be free cash flow positive throughout the cycle.

And with kind of the larger mega projects out there, your ability to add scale. You're not only services project, we're probably cut down on your delivered cost just from the ability to share. It would seem like that with that mega project dynamic still looking to accelerate that we should continue to think about you all remaining pretty focused on this on the growth platforms that you guys are putting out there?

That's right. We're just going to be disciplined and measured about doing so. And I think that's reflected in our CapEx reduction this year. We're always going to focus on returns, and we're going to focus on the bottom line profitability while we balance that against growth opportunity. But we have substantial growth opportunity in front of us with our 150 locations 31 state geography.

Perfect. Thanks so much and best of luck.

Thank you.

Steven Ramsey, Thompson Research Group.

Hi, good morning. I'm curious for are you guys or if you're seeing at competitors, the movement of fleet around the network to optimize your positioning to capture activity in good markets and maybe reduce exposure to slower markets. I know that's normal course of business, but maybe how does it compare year to date versus social (inaudible)?

You know, Steven, this is John. There's nothing terribly different this year compared to any previous years of moving fleet from low demand areas to those with higher demand is just basic fleet management. So we do that every year.

What I can tell you is we have moved a considerable amount of fleet around in the first half of the year from some areas that are a little bit softer to capitalize on this mega project opportunities so again, nothing really unique there from what we've done on any other given year.

Steve and let me add and Leslie mentioned in her comment, we're talking about [flow through]. We are absolutely going to throttle down fleet sales. Just thinking about fleet management, fleet sales in the back half of the year, we'll see a nice decrease compared to the front half of the year that we've just completed.

And that's a part of that product the fleet management in a nutshell, we have got the fleet allocated where we wanted and what we have left coming, that's going to go very strategically to the locations who are performing at the highest level and ensure that we continue to participate in get exposure to these mega opportunities.

Okay. That's helpful. And then thinking about mega projects, clearly H&E more generally focused on larger public peers have a larger base of specialty gear. Does do you feel like you're capturing all of the opportunity on these mega projects that you could four, do you feel like your business serving these types of projects gives you a right to win with specialty equipment and maybe spurs you to invest more in that type of fleet?

Look, I don't know that we've ever run across a project where we've gotten enough that we didn't want more, and your question is very fair, and that is could we provide more if we had more for us, specialty still continues to fit in the nice-to-have and not need to have. We have a small element, especially we're growing it organically, it's at the level it's at currently.

It's not really worth speaking about on calls, but we will continue to grow it over a period of time. That will be we view that as future or pent-up opportunity. That being stated, their general rental product on every single mega project in every single geography we serve and within that lies a lot of opportunity for H&E to continue to expand our exposure.

Okay. That's helpful. Thank you.

Thank you.

[Harvey Savage], UBS.

Good morning, guys. So just a quick question here on your CapEx. I know you helped guide this quarter, but how are you thinking about CapEx for the rest of the year? And have your plans changed at all between same store spending versus new branches has in?

Have you shifted any of the spends that you're planning on from same stores to new locations? And also how confident are you that we are won't need to cut CapEx here further this year?

Yeah. Harvey thank you for the question. We've got a similar case, we may be a little front end loaded on CapEx, but we're going to have a very traditional cadence regarding our CapEx to the question of are we moving from same store to new location. That's not we view these all in separate channels of spending and we plan associated.

So we're not taking from one to get to the other, as Leslie said, our access to capital, our cost of capital, we are not worried about capital constraints. We're purely focused on performance and returns. So that being stated that's not an issue for us going forward. How comfortable are we with our CapEx guide?

Listen, we are going to be disciplined. Currently, we're comfortable with the reduce $350 million to $400 million. If we see a reason to decrease we would do so. I just don't feel like that's going to be an issue for us if someone were to say what are the chances you go above your high end of your guidance?

I'm going to tell you that's not going to happen this year. We're focused on being disciplined, we're in a seasonal business. Q3 is always the peak of the seasonality. I suspect it will be again here in 2024, and we're comfortable with the guidance we've put forward.

Okay, that makes sense. And then just digging back into utilization for a second here. Last quarter, you noted that time utilization was just north of 70% started Q2, I believe. So it seems like there was a big deceleration in May and June. I know warm starts are a headwind, but I think you added the same amount in Q2 last year.

So can you just talk to us about what you saw with utilization trending Q2 throughout the quarter? And was it lower utilization across the board or were certain verticals or regions having an outsized impact there?

I will let John add some context. What we made at the time is our utilization was just a protein or a touch 67%. The simple answer is it's remain in a very similar profile. Since that point in time, we've had some incremental growth in fleet. John will talk about any puts or takes geographic. I mean, I know it's fairly consistently.

Yes, fairly consistent. I mean, obviously, we've had some areas you've had a little more of a struggle than others but generally speaking, it's been fairly consistent. I mean, we've seen incremental improvement. Obviously, since that Q2 average of 66.4% were north of 67% today when you look at Q3, Q2 of last year, 69.3% our third quarter average was 70%, so up about 70 basis points quarter-over-quarter.

As we sit here this year, we would expect to see at least that same type of a bump on an average for Q3. And of course, as we get into the fourth quarter. Seasonality sets in that was a little more challenging to speak about today, but I suspect we'll have an update on our next call.

I think you've probably caught in our prepared comments and the press release, but were down 290 basis points year over year, but up 280 basis points over Q1. So as candidly, as we have stated it, we would like to be up a little more, we were hoping for a little more. But we understand the environment we're in, we're encouraged by our go-forward opportunities, and we've adjusted our capital spending accordingly to these metrics.

Yes, I appreciate that, and I appreciate the correction there. That's my bad. I'll turn it over to. Thank you.

Thank you.

Alex Rygiel, B. Riley.

Thank you. Good morning, gentlemen. Could you help us to understand what percentage of your fleet is targeted to mega projects today, and or kind of what percentage of revenue is tied to mega projects today?

Alex partly I wish I could. I mean, obviously, we know we measure the amount of OEC that on mega projects and amount of OEC that content that we add on a weekly basis. And I'll tell you while I can't provide you a number, we're not going to start providing guidance. We are very happy with the cadence of what we're seeing in the marketplace, and it's a meaningful amount that we're adding on a weekly basis.

So it's a nice piece of our business. It will continue to be a growing piece of our business, and I do not anticipate a quarter where we're not making nice gains of deploying more of our OEC to mega projects than we had the preceding quarter.

And maybe if you can't quantify it exactly. But you've talked a lot about sort of the the pipeline or backlog and mega projects sort of growing. Is there a way to think about kind of what that growth rate has looked like maybe in this current quarter or over the last 12 months or so, is it up sort of 20% or is it up 100%? How how might you bracket that growth in backlog from mega projects?

Yeah, I don't have a percent, but I can tell you year over year, it's up substantially. And I think that in a year from now be able to make the same comments about this year. These projects are certainly they're not just emerging.

They've been emerging, they're advancing and more new projects are being announced and breaking ground almost on a daily basis. So it's a substantial improvement in the last 12 months. And my anticipation is that in 12 months from now I'll be able to say the same thing again, about 2025 as compared to 2024.

That's right. Thank you very much.

Thank you.

Sean Wondrack, Deutsche Bank.

Thank you for taking my question. I'm sorry, I don't mean to beat a dead horse, but just a couple more on the mega projects, are there certain gating factors that are preventing some of the smaller firms such as breadth of equipment or national presence or your proprietary tech? Could you just comment on that, please?

Yeah. Well, there certainly can be a you know, look, it's important with mega projects, and I think people confused sometimes had an individual investor asked me without a meaningful specialty, you're really disadvantage. And that certainly holistically not true, it's not the case. There are certain contractors on mega projects who use specialty products.

And in those cases, H&E would be disadvantage. I can't supply them on a power generation or trencher HVAC, maybe on a particular job. However, there are various trade types who don't ever use those types of products that only use the general rental, the aerial work platforms and telehandlers, earthmoving products, air compressors, things of that nature and we're not disadvantaged.

Now your question is how do you become disadvantaged outside of that technology would be number one. I mean our technology is second to no one. Again, I believe many times is misunderstood because at our size and scale folks may just assume that we don't have advanced technology, but in fact, we do our customers pay their bill online.

They requisition equipment online and manage their account. They're reporting that telematic data, the list goes on and on and also we're disadvantaged in that respect. If you don't have telematic data, if you do not have a portal, if you don't have an ability for your customers to consolidate their billing, pay it online to view and manage their account more broadly, you're absolutely going to get excluded.

So I know it's probably the top five, six companies by volume in the US who are participating. If you drive on these projects, that's what you're going to see and you're not going to see smaller participants.

That's very helpful. And it kind of leads into my follow-up. When you just think about the top five or six players sort of doubling their share over the last 10 years and a lack of access to these mega projects. Does this create opportunities to acquire some of these mom and pops they maybe weren't going to sell themselves earlier, but don't have access to this market demand here?

The answer is yes. We have actually purchased companies that two or three years ago, so they may never sell their business and their realities change. The cost of technology is just a hurdle. They can't handle, I mean, for a number of years. The cost of capital, the access to equipment, the price that they pay compared to H&E or larger competitors is just an extreme disadvantage for them and many more companies have come to the realization, that they're either going out of business slowly or that they're going to have to sell their business. And yes, we have seen those opportunities.

Great. Appreciate that. And if I could squeeze in one more on, just on the infrastructure side. I'm not sure if you have an answer to this, but give an idea of maybe what inning we are in relative to the infrastructure span. I mean the funds came in a few years ago, there was sort of a slow rollout the past couple of years. It seems to be accelerating a little bit. It's difficult to tell kind of from where we're sitting?

Yes, I'll take that question. Look, I think we're in the early innings that while we have seen funds released and look, these projects are breaking ground every day. I mean, from looking at the road work, bridges, airports, seaports, I mean, you name it. The infrastructure work is really starting to pick up steam. And we see this as a multiyear opportunity. So a short answer is early innings.

That's great. Thank you for answering my questions. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Brad Barber for any closing remarks.

Yeah, thank you operator. Before we conclude today's call, I want to reiterate a couple of things, not the least of which is our strategic commitment to growth and our strong track record of success. As we stated earlier, H&E established one of the most attractive growth profiles in the industry led by a highly successful accelerate new location program. By the end of this year, I expectation H&E we'll be nearing 50 or more new location opened, opening since we implemented this strategy in 2021.

Over the same period of time, we've completed four tuck-in acquisitions, adding 16 additional locations. And while we've been focused on achieving the significant growth in locations. We also have been pleased with our same-store growth and margin improvement.

Our shift away from distribution to pure-play rental focus has proven to be a winning strategy providing us with greater durability in our revenues and associated margins. We remain fully committed to our accelerate new location strategy with expectation of 12 to 15 branch additions per year as we continue to pursue additional tuck-in acquisitions that meet our criteria.

We possess both the people and the capital necessary to support our ongoing growth plans, and we look forward to updating you on our future achievements. With this will conclude today's call, and we appreciate your continued interest in H&E Equipment Services and look forward to speaking to you again soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.